COLUMN-China faces new challenge in trade rebalancing act

By Wei Gu

HONG KONG, Aug 27 (Reuters) - China may have overwhelmed the United States -- not to mention the rest of the world -- in its quest for Olympic gold, but when it comes to trade China may be losing its edge.

A spate of factors including a weak dollar, sluggish U.S. demand and high commodity prices have started to rebalance the trade accounts of both Beijing and Washington.

Experts agree that is not necessarily a bad thing. The question is whether China can do the rebalancing without a hard landing.

The exports that have helped to fuel 30 years of China's growth need to be balanced by more domestic consumption in the future. And policymakers who have focused on keeping growth at a breakneck pace now need to pay more attention to sectors that are more energy-efficient and pollute less.

"China's trade surplus might come down significantly if the government is serious about rebalancing the economy, and it is something that we would like to see," Bin Zhang, an economist at the research centre for international finance at the Chinese Academy of Social Sciences, said in a report.

"Whether that will happen depends on the authorities' political wisdom and will in fighting against certain interest groups," he added.

Exporters have been lobbying for export rebates and slower yuan appreciation. Local governments and the Ministry of Commerce are on their side because they count on the export sector to create jobs.

TIDE HAS TURNED

Just before the Olympics, for the first time in years, China's exports grew more slowly than America's. June exports were up 17 percent from a year earlier compared with 23 percent in the United States.

China's dollar-denominated trade surplus and the U.S. trade deficit are both stabilising and even shrinking this year, and the trend is even more telling measured in yuan.

By that measure, China's export growth has slowed steadily for the last 18 months, said China research firm Dragonomics, adding growth will slow further if Europe heads into recession.

The figures may have been distorted by high commodity prices but that would have affected the import bills of both China and the United States.

Economists agree the tide has turned.

"The trend is turning," said Hong Liang, outgoing China economist of Goldman Sachs. "For those who said yuan appreciation won't help adjust the trade balance, the changes in U.S.-China trade dynamics are proving them wrong."

Only in recent years has it become clear to the Chinese that the growth model that has helped it become the world's fourth largest economy comes at a price, including the overuse of energy, underpaid labour and low returns on the country's massive reserves of foreign exchange.